Strategic Insights

For readers who haven’t been following this series of posts, it makes sense to read these posts first:

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These insights can't be labelled or bracketed into any category, but are pretty useful all the same.

The flexibility of style - going short as well as long, is a key element that is common to most successful traders.
Another question we should ask is: How should we put on a trade idea? The way the trade is implemented can be more important than the trade idea itself.
The basic feature which is common to failed trade ideas is that most traders have No Trading Plans; which leads to poor execution. This is the basic thing that differentiates losing traders from winning traders. Once an effective trading plan has been developed, it is critical to convince the subconscious mind of the new reality. The greater the harmony between the conscious and the subconscious mind, the better the chance for success.
If there is any trading halt due to volatility, one should ideally be neutral at the halt. History books show that being long is the best strategy, at least one shouldn't stay short.
The beginning of any move is hard to trade because you're not sure whether you're right or wrong. The end is hard because people are booking profits. The middle of the trading move is the easy part. In other words, one should fade the extremes in any move - the tops and bottoms. Never try to buy at the bottom or sell at the top. The market can end up sitting there for years tying up your capital. You don't want to have a position before a move has started. You want to wait until a move is underway before you get into the market. Trying to pick tops and bottoms is a mistake many traders make - they put their own opinion of what will happen before the market action.
Most of us should be using short time horizons for putting on trades. Only short-term trades can be predicted with any precision. The accuracy of the prediction drops off dramatically, the more distant the forecast time. There are too many unpredictable things that can happen in two months, the ideal trade ought to last 10 days.
Trying to predict the direction and not the magnitude of trade is what any trader should aspire for. Avoid setting price targets and get out when the market tells one too, not on any consideration of how far the price has gone. You must learn to take what the market gives you and you shouldn't hesitate to take it even if it is small.
Some traders focus on trading market-moving events, seeking to capture large gains over short-time intervals - typically only minutes, by identifying and preparing for events that signal a high probability of accelerated price swings in the anticipated direction. For those who aspire to execute such trades the key is trade preparation. In all such instances, one is only betting on the direction and not on magnitude.
The conventional wisdom is to add to winning positions, as long as the odds are favourable. This may be true when we are investing for the long-term, but from a trading mindset, this is a poor strategy. As a rule, one shouldn't add to winning positions. The biggest position should be on the day one puts on the trade. After that, the trade size should only shrink.
The Weekend Rule says that if the market closes in a new high or low ground on a Friday, then it is likely to extend that move on Monday and early Tuesday. (Donchian Rule). This works even better when it is a three day weekend. If you stay in a losing position over a weekend, the losses are likely to get wider. The Friday close is the most critical price of the week because it is the price at which people commit to accepting the risk of holding a position over the weekend.
If you speculate with a loss, to get less of a loss, you get more of a loss.
When the market experiences a big move down, the first rally never holds. If there is ever a case where I want to sell into strength, it would be the first rally after a straight-line drop. Often the rally will last for only two days after the reversal day.
If there is a parabolic price move on an intraday time frame on a position that one holds, will lock in profit instead of waiting for it to go much further. A related strategy is to book partial profits on trades rather than holding the full position until exit.
If you have a loss on trade after a week or two, you're wrong. If you're at breakeven on a trade and a significant amount of time has passed, you're probably wrong.
As a general rule, when an important fundamental development occurs, the initial direction of the market move is often a good tip-off of the longer-term trend. The reason the market leads is that there are people who know more than we do.
In bear markets, you have to use sharp countertrend rallies to enter positions.
If you are very nervous about a position overnight and especially over the weekend, and you're able to get out at a much better price than you thought possible when the market trades, you're usually better off staying with the position. The rationale is that when your worst fears aren't realised, you probably should increase your position.
When a price moves out of a trading range it is called a breakout and in situations where such breakouts occur for reasons that nobody understands, it leads to trade with a favourable risk-reward. Breakouts that occur because there is a story in the media are less relevant. The Heisenberg Principle provides an analogy for the markets. If something is closely observed, the odds are it is going to be altered in the process. If corn is in a tight consolidation and it breaks out the day the WSJ carries a story about a potential shortage of corn, the odds of the price move being sustained are much smaller. If everybody believes there is no reason for corn to break out, and it suddenly does, the chances that there is an important underlying cause are much greater. In other words, the lesser the explanation for a price move, the better it looks. Conversely, the more a price pattern is observed by speculators, the more prone you are to have false signals. The move in a market for a product of the non-speculative activity, the greater the significance of technical breakouts.
If you are stuck in a position and you try and hedge the risk by taking on a counter position in some other stock or index, more often than not, you are now solving two problems instead of one. If the problem is so great that you need to hedge it, why not attack the problem directly? If you've made a mistake, deal with the mistake, don't compound it.
When one sees hysteria, one should prepare to take the other side of the trade. In such situations, what usually happens is that the market starts moving in gaps. Just about every time you go against panic, you will be right if you can stick it out.
Even though markets look their very best when they are setting new highs, that is often the best time to sell. To some extent, to be a good trader, one has to be a good contrarian. One has to look for a market that is losing momentum and then take the other side of the trade.
In a market that has been trading narrowly, if there is a sudden range expansion, human nature is to try and fade that move. Moreover, whenever there is a range expansion, the market is sending you a clear signal that it is getting ready to move in the direction of the expansion.
We should expect the unexpected in this business. Don't think in terms of boundaries or limits to what the market can and cannot do; think in terms of extremes. The unexpected and the impossible happen now and then. Don't be too tied to history.
When the price action turns scary, it is usually a time to buy, not a time to sell.
Trend following is useful as long as you don't use it try and hit the top, or pick the bottom. The problem is that when markets have gone up in a parabolic fashion (as they did from April 2020 for the next year), the temptation to expect a sharp correction or even a crash is pretty human. As a result, many traders try and short the index. This may work, but it's not exactly trend following, we are trying to hit the top which is the opposite of picking the bottom. Both strategies are inherently premature and against the trend. We are invoking the Law of Averages, which says that - the outcome of a random event will even out within a small sample. However, what we miss is the fact that this law, reflects bad statistics or more wishful thinking than any mathematical principle. The Law of Large Numbers should not be confused with the Law of Averages. The law of large numbers says that the average of the results obtained from a large number of trials should be close to the expected value, and will tend to become closer as more trials are performed. The Law of Large Numbers guarantees stable long-term results for the averages of random events.
When a chart pattern fails, it is a more reliable signal than the pattern itself - which is another way of saying: from failed moves come fast moves in the opposite direction.
Never underestimate the ability of people to be optimistic and believe that everything is going to be okay. What matters is not whether growth is good or bad, what matters is whether growth is getting better.

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